Magazine

News You Need to Know

April 29, 2009

Carving Up the Carmakers

The wheeling and dealing went down to the wire, and at press time, President Barack Obama was reported to be readying two versions of a speech for the morning of Apr. 30—one saying Chrysler is filing for Chapter 11, the other that it forged a workable recovery deal. Either way, the company seems destined to be divvied up, with the United Auto Workers owning the lion's share, Fiat (FIATY) about a fifth, and the government the rest. General Motors (GM), facing a similar deadline about a month off, was also negotiating furiously, having presented a new recovery plan under which it would shrink even more than previously envisioned and kill the venerable Pontiac brand. Under GM's latest proposal, the UAW would wind up with 39% of the company, the feds 50%, and bondholders about 10%—all in exchange for writing off tens of billions in debt.

Stress Test Fallout

For bankers, it's the ultimate "pass-fail." Sometime around May 4—the date keeps getting pushed back—federal regulators are expected to release the results of "stress tests" designed to determine how much capital, if any, the 19 biggest U.S. banks would need if the economy worsened much more over the next two years. According to various media accounts, as many as six banks—including Bank of America (BAC) and Citigroup (C)—could be ordered to raise billions. Regulators realize the challenge banks face in landing new equity from leery investors, so the G-men are debating whether simply to force banks to convert TARP bailout money from preferred to common shares—an accounting maneuver that would pump up their capital ratios but dilute the stakes of existing shareholders.

Brouhaha at BofA

For Bank of America CEO Ken Lewis, 2009 could be renamed The Year of Living Dangerously. According to newly released depositions, Lewis told New York prosecutors that then-Treasury Secretary Henry Paulson threatened to oust him if he backed out of last year's deal to acquire Merrill Lynch amid soaring losses. But in The Wall Street Journal on Apr. 27, ex-Merrill Lynch (MER) CEO John Thain claimed Lewis was aware of Merrill's crashing finances and used Thain as a convenient scapegoat when investors expressed outrage over the deal. At the Apr. 29 annual meeting, Lewis was ousted as chairman of the board, but he remains CEO.

Swine Flu Spreads

Just when some optimists started spotting green shoots in the global economy, a new threat loomed: the virulent swine flu strain that was blamed for more than 100 deaths in Mexico and had reached Europe and the U.S., where the first death was reported on Apr. 29. Stocks of airlines and hotel chains got slammed on Apr. 27 as investors braced for a fall in travel, and Mexican retailers suffered as shoppers stayed home. Some economists say the impact on global business is unlikely to be as severe as during the Asian SARS outbreak in 2003. But that could change if swine flu sweeps the globe, and on Apr. 29 the World Health Organization raised its alert to one level short of global pandemic.

Black Ink in Europe

A slew of companies including German electronics giant Siemens (SI), Spanish bank Santander (STD), and French drugmaker Sanofi-Aventis reported first-quarter earnings that were shinier than expected—or at least not as dismal as feared. Germany's SAP (SAP), for example, cut costs enough to maintain a 24% operating margin even as software sales plunged by one-third. On the other hand, disappointing numbers from carmakers Daimler (DAI) and Peugeot (PEUGY), as well as oil majors BP (BP) and Royal Dutch Shell (RDS), came as a reminder that there's still plenty of pain out there. And investors aren't persuaded the healthier companies can keep it up. Deutsche Bank (DB) shares fell 7% in Frankfurt after the company said on Apr. 28 that it earned $1.6 billion, compared with a year-earlier loss.

Chip Rivals Settle

Case closed—at last. Mobile-phone chipmaker Qualcomm (QCOM) agreed on Apr. 26 to pay rival Broadcom (BRCM) $891 million to settle a four-year feud over charges of patent infringement. As part of the deal, Broadcom will drop complaints against Qualcomm at the European Commission and Korea Fair Trade Commission. The accord also gives both companies undisclosed rights to each other's patents. By settling, Qualcomm sheds its biggest legal distraction since Nokia (NOK) came to terms on a contract last year—and saves millions a year in legal fees.

See "Qualcomm, Broadcom: The Spoils of War"

iPhone Flirtation

Is the iPhone about to cozy up with another carrier? Talks have intensified in recent months between Verizon Wireless and Apple (AAPL) over a plan to bring the iPhone or a new version of the device to Verizon's network, BusinessWeek reported on Apr. 27. One scenario may involve a gizmo described as an "iPhone lite" with a smaller screen. According to people familiar with the matter, the companies are also developing an Apple "media pad" that would sport a screen similar to the iPhone's but larger. Apple continues to maintain that its exclusive agreement with AT&T (T) as iPhone service provider in the U.S. is not likely to change soon.

See "New Gear From Apple and Verizon Wireless?"

Lehman's Legal Tangle

It's beginning to look as if the Lehman Brothers (LEHMQ) bankruptcy proceedings could be hopelessly snarled for years. When the firm went under last September, it listed $613 billion in liabilities—the biggest corporate bankruptcy ever. It also had more than a million open derivatives contracts spread among offices all over the world, with each office governed by local bankruptcy laws. Now a feud is brewing over whether all the entities will work together or adopt an every-office-for-itself approach. Earlier in April, administrators for many of the worldwide branches signed a protocol for information-sharing that should help the firm unwind efficiently. But the London office, which served as a clearinghouse for European operations, is so far refusing to go along—and that could throw a giant wrench in the works. (Crain's New York Business)

Portfolio Shuts Down

The new player in the business-journalism field proved unable to withstand the economic slump. Magazine giant Condé Nast Publications shuttered Condé Nast Portfolio on Apr. 27, just shy of its second anniversary. Portfolio was launched with a $100 million-plus budget by its deep-pocketed owner but failed to catch on sufficiently.

See "Condé Nast Shutters Portfolio. Why It Failed".

A Maverick Jumps

He has long been known as an iconoclast, but Pennsylvania Senator Arlen Specter seriously shocked his fellow Republicans this time. On Apr. 28 he announced that he's switching parties, bringing the Democrats within reach of a filibuster-proof 60 votes in the likely event that Al Franken ultimately takes Minnesota's open seat. Specter said he jumped because he didn't think he could win a primary against a conservative GOP opponent next year. He vowed he wouldn't march in lockstep with the Democrats, either, and to make his point, he reaffirmed opposition to "card-check" legislation easing union organizing rules. But his conversion could make a compromise on that issue easier, and it raised Democratic hopes on other measures of concern to business.

See "Specter Switch Raises Hopes for Card Check"

The Shrinking Economy

Businesses cut back and emptied their shelves instead of producing new stuff. Now their inventories are so low that they'll have to boost production soon. That's economists' optimistic interpretation of the worse-than-expected 6.1% annual rate of decline in first-quarter GDP, as estimated by the Commerce Dept. on Apr. 29. The same day, the Fed stood pat on monetary policy, saying "the pace of [economic] contraction appears to be somewhat slower." Another ray of hope: On Apr. 28, Standard & Poor's said that the S&P/Case-Shiller Home Price Index fell by 18.6% in February from the year before. It's the first month since October 2007 that the annual decline has not set a record.

Danny Pang Charged

Following an investigation by The Wall Street Journal, the SEC on Apr. 27 filed suit against Orange County (Calif.) money manager Danny Pang, accusing him of defrauding investors out of "hundreds of millions of dollars" by using newer clients' money to make interest payments to older ones, as well as misrepresenting his credentials and the insurance backing the investments. The next day, Pang was arrested by the FBI on charges of structuring cash transactions to avoid reporting requirements. Pang's attorney told the Los Angeles Times that "we intend to demonstrate that Mr. Pang did nothing wrong."

Where Life Is Nice

The votes are in and the winner is: Vienna! The Austrian capital edged out Zurich for top honors in the latest edition of Mercer's quality of living survey, an annual report targeted at multinationals that oversee large numbers of expatriate staff. The report ranks 215 cities on such criteria as housing, schools, and infrastructure. No U.S. city even made it into the top 10. And what burg wound up at the bottom of the bunch? Baghdad. (Mercer)